Monday, February 28, 2011

Banks Ordered to Open the Spigot

Last month the State Council's "No. 1 Document" announced water projects would be the focus of rural policy. This month the China Bank Regulatory Commission issued a notice on rural financial services which requires rural financial organizations to support construction of rural water projects: building canals, fixing dams, installing pipes and pumps.

The Agricultural Development Bank (the government's policy bank for agriculture) is told to increase medium- and short-term loans to large-scale irrigation districts and key medium and small irrigation districts.

The Agricultural Bank of China (a sort of private/public behemoth that foreign investors just dumped billions of dollars into through its IPO) is to focus on loans for irrigation infrastructure (canals, reservoirs, pumping equipment) and drinking water construction projects in rural areas.

Rural credit cooperatives and postal savings banks (small rural institutions where rural people keep their savings) are to make loans for small-scale rural irrigation and field-upgrade projects.

This is an example of China's practice of coopting banks to carry out policy, and the multiple responsibilities of Chinese regulators. Regulators like this one are expected to regulate the industry but also make sure it carries out government policies. The Bank Regulatory commission was set up about 10 years ago to give banks an independent regulatory authority to make sure they don't pile up bad loans like they did in the 1990s. Now the regulator is telling banks to set aside loans for irrigation projects that have little prospect of generating income to pay the loans back. (Farmers can only be charged tiny fees for irrigation water because charging them full cost would increase their financial "burden.")

This policy would be like the U.S. Federal Reserve--an agency responsible for making sure banks are in sound financial condition--telling banks they have to set aside a certain percentage of their portfolios for loans to "underserved" poor communities. Oh, wait, the U.S. tried this--it was called the Community Reinvestment Act--and it contributed to one of the worst financial crises in history.